Cheerleaders

I have never been too vocal in the CNBC is Bubblevision argument although admittedly I have made reference to it before. However, this morning I saw something that did bolster the view many have the this news station is a bit biased towards bullishness.

They have plenty of flash from graphics to special reports but today the screen shot just said "Summer Rally." Did that mean they think it is just going to last another month? Did that come out as a contrarian sentiment indicator might?

They also had a "stat" that July was up 61% of the time. Meaningful? Since 11 of the 12 months average gains over time that means they are up at least 50% of the time (September is the exception). The gains made over the winter dwarf the summer gains so is winning enough for investors to embrace? I personally would care about making a lot, not just winning 61% of the time.

Anyway, just my .02. The combination of "theme" and statistic just got me thinking that everyone seem to be bullish again. Even the AAII survey flipped from 54% bears three weeks ago to 31% now. The percent bulls also changed some 20%.

Wounded but Walking

I remember back a bunch of years to when I was the Editor of the Market Technicians Association newsletter and we were putting a cover story together about the bear market then in progress. I found a picture of a growling bear, one that I still see fairly regularly online by the way, and put it on the cover. The caption read, "Oh, no, now I am a contrary indicator."

Sure enough, the market soon found its bottom.

This was a brutal two weeks for me as an analyst. I won't claim any pain for the first week since I did see a bounce coming. However, like many, it was the sheer size of the move that had me running for the Mylanta (store brand, of course).

Was technical analysis worth anything? How come things are not working? Was my CMT a waste of effort? And why on Earth does anybody need any newsletter advice at all? Just follow your gut and away you go!

So I pondered getting out of the business as I do from time to time. I don't need this kind of headache. I'm already five chapters into my novel so it would be so much better to create something people would enjoy instead of open myself up to flaming emails about my articles.

Well, those five chapters were written in the early 1990s and I have not looked at them since. And I always get this way after a rough patch. However, I have no patent on rough patches. We all go through our own professional hell from time to time and somehow bounce back.

So why was I feeling extra blue? Was it the way my analysis was off the mark? Who is perfect with theirs?

Was it the way I'd get stopped out and only one day later the market turns in my favor? Please, nothing unique there.

Or the way the free market has been compromised by well intentioned but poorly designed intervention? Or that one nameless company turned the whole thing to its advantage to make billions?

Jealous? Sure. Bewildered? Definitely. Ready to quit? Yes, but I won't. The market is clearly not what it was even a decade ago and we have to adapt. That will probably be a lot of fun - learning new things and evolving as an analyst.

I will take my feelings as a contrary indicator. Every time I start to think that maybe everyone else is right and I am totally wrong things change for the better.

My message is that so many people are making so many arguments that this is a new bull market that the opposition seems to be smothered. Here is a quote from a professional chat list I follow:

Quote - "I see much of the same..."informed" people around me getting long....perennial stock market losers going into bonds and cash." End Quote

It was an overwhelming consensus.

To quote my departed friend and colleague Mike Epstein, "Fade the list." When the pros call the public losers then then we've got a good sentiment indicator based on arrogance.

How Now Brown Dow (Theory)?

Today's column was on Dow Theory and how I do not believe it fired a buy signal. Thanks to a professional chat room, I was referenced to Robert Colby's research on the topic - http://www.robertwcolby.com/dowtheory.html. He did not register a buys signal in February as many experienced practitioners did and that actually adds to my argument back then that any signal people thought had occurred was garbage.

And now, Colby said the buy signal did indeed fire last week. But even when a guy who actually proves what he says thinks a signal fired I do not believe it is useful for investors. The rules of the market don't change but the way we apply our tools certainly must. Markets do not stand still.

I still abide by the math thing I've been writing about where normal markets (whatever that is) have formulas similar to geometry. Perhaps the reader remembers way back to high school math and the formula y = mx +b. Here, m is a variable and b is a constant.

Normally, that constant is negligible. Let's make something up like it is 1/2 Dow point. But when the markets are not functioning properly that constant can balloon to 500 Dow points. It can easily overwhelm the analysis and since most of us assume it remains negligible we are thrown way off by the formula's results. Crash, credit market freeze, negative interest rates, false breakouts, wacky sentiment, you name it.

So, what really makes up that "b?" How about government intervention? It is certainly not negligible now.

Whipping Boy

Yes, poor Goldman Sachs is the public's whipping boy. Gambling with government money for sure but aren't we all just a wee bit jealous over how they can turn shinola into gold? I know I am.

So here is a Quick Take on the stock. The market is a lot stronger than regulators even will be.

You make the call. I just show the chart.

Naked Shorting Gone!

So today the SEC put the hammer down on the short selling of shares of stock that you do not own or can not borrow. Is this a new rule? No. It's just enforcement - sort of like all the other laws on the books that somehow have no teeth.

But now it is going to be harder to short stocks - or is it? Will it really be any more of a challenge for me to short my 100 shares of Amazon via Fidelity? Or 200 shares of eBay at Schwab? You get my point. Most of us are probably going to yawn at this one.

What we should be watching, however, is the growing trend for brokers not to let retail use leveraged ETFs. I suppose it is a good thing for a broker to know if their customer is fully aware of what these things are but a blanket rule seems like taking the meat for the big boys and letting retail have the bread.

What may be worse is that Nanny (I mean the government - specifically FINRA) says that they are too dangerous and should not be allowed for retail. While I concur that they are time bombs, so is smoking. Let anyone kill themselves if that's what they want as long as they don't take anyone down with them. I don't want to pay for smokers' health issues and I don't want to suffer because someone lost money trading FAZ. But everyone has the right to hurt themselves if they choose to be so stupid (pulling no punches on this one).

What's next? Commodities ETFs? Options? How about all stocks not in the S&P 500 to eliminate more risk for us poor retail slobs?

How much more meddling will they do? How about fostering an atmosphere where creating this derivative crap is not profitable. A strong economy might be nice.

Sentimental Lady

For all you Bob Welch fans, this one's for you. Still a youngin? How about Fleetwood Mac?

Sentiment is a wonderful tool these days. Certainly, charting is going a bit awry as the failed head-and-shoulders - before this 9% rally - proves. But while traditional chart reading - as in sell the breakdown, collect profits - was ferblungen (that's a technical term) those who took the pulse of the marketplace were ready to go.

Yes, even Mikey the Bear (that's me) was looking for a bounce. No, not 9% but something. I was not fooled by the head-and-shoulders everyone and his dog was talking about. Did I mention this in the blog that Mark Haines was grilling every guest - and I mean even the fundie guys - if they were watching the pattern.

What everyone knows is not worth knowing (Old Wall Street lore).

Today, everyone was waiting for the correction that surely was due. After all, the Naz was up 12 straight days. I remember a rule of thumb I used back in the bubble days when I bought a stock for a dead cat bounce after 10 down days in a row. You'll never guess my favorite winner back then - Enron! That pig was heading for the barbecue and I made money on the long side with an overnight trade.

Good thing I did not try that this week. I'd be the one on the spit, slowly turning, turning, turning over the flames.

These days, everyone seem to be hip to those old little tricks and naturally they do not work. Fade the Nasdaq? It did not work at 10. It did not work at 11. And it did not work at 12 although there is a little day left to go.

Sentiment was too bearish. No, not the VIX or the AAII survey. These things are also getting overused and are under effective.

But that is short-term stuff. Thursday was a demoralizing day for the bears so while I think today's timing was off I can feel the capitulation building.

Oh, and Sentimental Lady was a song by Bob Welch in the 70s and again by Fleetwood Mac (with Welch in the band pre-Buckingham-Nicks) not long thereafter.

Tea Leaf Fundamentals

I just read a blog post from a guy who presents himself as a friend to technical analysts but when we are not looking he throws out zinger after zinger in his missives. To wit:

Plenty dismiss the notion of chart watchers divining the future direction of stocks from patterns, but as market blogger "Mr Hyde" (to protect the two-faced) noted in a recent post, there can be value in paying attention to chartist chatter. ”The only justification that I see for paying any attention to chart patterns is the simple fact that many others pay attention to chart patterns, which then moves chart pattern analyses to the behavioral science realm – the study of your fellow investment rats and how they run the maze,” he wrote.

Hmm, let's turn that around.

"The only reason to pay attention to earnings and market share is the simple fact that many others pay attention to chart patterns, which then moves chart pattern analyses to the behavioral science realm – the study of your fellow investment rats and how they run the maze."

But don't higher earnings translate into higher market price for stocks? Yeah, that worked over the past 10 years, didn't it? And how do you explain why any stock trades above or below fair value, whatever that is?

The simple fact is that stocks deviate from fair value because investors, and I use that term lightly, think they are worth more or less than that. The fundamentals do not and cannot explain how a stock is priced in the marketplace - period. Go ahead, prove me wrong.

Therefore, higher earnings are like cheese to the rats, as Mr Hyde would say, just like chart pattern breakouts would be the same for technicians.

It is not patterns or earnings that give stocks their prices. It is supply and demand for shares because no matter how great earnings may be, if nobody wants the stock then it will not go up in price.

Rant over. We now return you to your regularly scheduled program.

Faulty assumptions

Today, I got yet another newsletter from a well-seasoned market analyst (perks of writing a public column). In it, he says that we can push the rally a little while longer and based it on a few factors including my beloved technical analysis. Specifically, he looked at breakaway gaps on the indices last week and assumed that they would indeed lead to more gains.

While a few more percent to the upside is not unreasonable, and I even left that door open in my column today, his reasoning was based on the typical technical analysis as it has always been practiced. See a pullback, see a breakaway gap, make trade, collect check.

Sorry, not in this market. Indeed a similar event happened in early June as the market broke higher froma trading range. That lasted a few days before the four week correction set in.

Message - do not assume. You make a donkey out of you and your portfolio.

Banks are Bunk

In last week's sector column I suggested that the banks looked like they were rolling over. Of course, the market took all boats higher last week but the BKX index failed to make a higher high - no not a higher high than its previous rally peak but its most recent swing high. The S&P 500 has equaled, more or less, its highest rally high. Even the lagging Russell 2K took out its most recent swing high (in its bear flag).

Monday, Dow up 100, BKX was red. Tuesday, Dow up 67, BKX down a whopping 3.1%.

While I am starting to get hate mail from my column, and yes, I missed the 8% rally, but I am not in this for one week swings.

Believe it, or not

Homies Looking Better but Not Great

The point of today's column was to show that despite some of the news that's out there, the market still has not blessed the housing sector with recovery. Don't get me wrong, I do think the worst is finally over but as far as giving it my blessing, not that I deserve to bless anything, and by extension my blessing on the economy, well, you know the rest.

Here's a version of the Toll Brothers chart that I did not publish today:

Yes, that is a short-term breakout but check out on-balance volume. Nobody is accumulating this dog. Meritage was better but not enough to get me excited about it.

The bottom line is that an investment in homebuilders should pay off in a year or two but I am looking for more of a pre-construction price.

Another round of Kudos

Kudos got to the human spirit today and because of it I have no doubt the current crisis will end. Of course, the human spirit also will start the next crisis but let's enjoy the moment.

Do you remember where you were 40 years ago today? Of course, some of you were not even on your parent's radar yet but for we old timers and middle timers (what about market timers?) we should know.

Personally, I was in the dining room/theater at sleepaway camp (Mar-Lin) in Connecticut, sitting in nice little rows watching a black and white TV as US astronauts took their first steps on the moon. We will hear a lot about that event - the moon landing, not my camp - in the media today and rightly so. Unlike celebrity misdeeds and political BS, landing on the moon shows what we the people can do with proper goals and proper attitude.

We the people. Now there's a concept.

Visting Day

Like many of my peers around the metro New York area, I am heading to the Pocono Mountains in Pennsylvania this weekend to visit one of my kids at camp. If I had all the money I spent on the luxury they call "camping" I'd bail out CIT myself. But that is another issue.

It has been a rough week for me and the bears (bad grammar intended) as the stock market soared. No, I was not caught off guard for the rally and I wrote it up in Monday's newsletter. But the distance it traveled killed me. Visiting Day will be a vacation away from thinking about it so I can return next week with a clear head.

Here's what I see:

dollar is weak
commodities have corrected
stocks flipped not only me but every analyst on Wall Street the bird.

Have you ever seen so much flip-flopping? Everyone was bullish. Everyone was bearish. Now everyone is bullish. I cannot wait to see the sentiment numbers for this week.

Kudos

Market related at the end.

Just wanted to acknowledge an often unsung hero - the truck driver. It is not often that I as a driver patiently wait - on a busy road when I am in a hurry - for the vehicle in front of me to slowly back up into a parking lot or driveway. But for big rig drivers, I sit there is awe at their ability to maneuver a huge machine in tight spaces with precision.

The face of real people being dumped on by Wall Street and Washington. The bull market is not going to return without jobs. Jobless recovery, my derriere.

Did I just bash TA?

No, I did not intend to bash technical analysis. I was bashing analysts in general but it did not come through that way on edit.

Perhaps I was just getting down on technicians who were like John Kerry in Dubya's TV ads in 2004. Any way the wind blows.

Golden cross? Must be true, get bullish!

Head-and-shoulders? Must be true, get bearish!

Failed head-and-shoulders? Must be true, get bullish!

My head is spinning from all the flip-flopping. Suddenly the SpongeBob theme song is in my head and I see analysts dropping to the deck to flop like a fish. Go as your kids for the lyrics sheet if you do not understand.

Here's the deal - the market is doing its job. It is making as many people as possible look bad as it chops up daring swing traders. Day traders - awesome. Swing traders - chop, chop, chop. My own picks are well underwater right now but the higher this rally goes, the better the shorting will be. I personally took a nibble near the close.

Goldman Disappoints

Disappoints? As one news report said, "they knocked the cover off the ball." They even beat the so-called "influential analyst" target earnings number by a lot and she was a huge number over consensus. Yet Goldman Sachs open lower Tuesday (even though it is slightly in the green at the time of this post).

As I wrote yesterday, they had to crush the whisper number and apparently they did not. It is early but seeing such a whoop it up analyst upgrade after a 150% rally fits right in with a top. But again, it is early. Let's see where Goldman ends the week.

Here is another headline from this morning: Stocks stumble out of the gate, as data on PPI and retail sales cloud any enthusiasm over J&J and Goldman Sachs results.

I guess they had to blame something. How about buy the rumor, sell the news on Goldman? How about retail sales were indeed the best in five months but it was six months of garbage. Sorry for digressing into the fundamentals on the last one. Did you see the sub-headline? Core sales down for fourth straight month.

Journalists. Give them a break because they have to earn a living.

Of Banks and Men

OK, a literature student I was not but Dickens' immortal words ring true for banks (yeah, I know, the title was from Steinbeck).

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness....."

Sounds likes banks to me. Goldman Sachs soared while 53 of its tiny brethren failed this year to date. And now, after at 150% rally this year and more if you go back to the November low the street goes wild when an analyst upgrades it. Uh, thanks for nothing. Where were you when it was an actual low in progress?

I am sure she knows her stuff. But fundamental analysis was never any good for timing so I say welcome to capitulation. Earnings better be beyond the whisper numbers or Goldman stock cracks.

Swedish Meatballs

With apologies to readers of Swedish heritage.

Here is something that hit the chat rooms today. Note the date of this supposed news story (July 2) where Sweden cut its short-term rate to negative 0.25%.

MarketWatch, Bloomberg and Reuters said it was cut to a positive 0.25%.

Trust but Verify? Sorry Mr. Reagan, when the markets are involved it is Verify then Trust.

Here's the link to the meatballs.

Sweden Cuts an Interest Rate Below Zero
http://blogs.tnr.com/tnr/blogs/the_stash/archive/2009/07/02/sweden-cuts-a-key-interest-rate-below-zero.aspx

Recap of Strange Indicators

Here are what the pundits have been talking about over the past few weeks.

Coppock Curve - Fired a long-term buy at the end of May. Still in effect. However, it does not take into account any draw downs that are very possible in this volatile environment.

Golden Cross - The exponential version - the one I believe - fired on the Nasdaq (but not the more important S&P 500). It is already in jeopardy of crossing back. The simple version fired last month and is still in effect. But that is in direct opposition with.......

Head-and-shoulders - They are still falling over each other declaring a top in the market due to this pattern. Read Wednesday's Barron's Online column for what I think of it.

So, we have a super long-term signal (bullish) that puts us at risk for multi-weeks of drawdowns. Then analysts were crowing about a bullish signal and start of the next bull market firing days before everyone was trying to be the first to crow about a topping pattern.

Any way the wind blows.......

Wednesday Follow-up

Apologies for not covering the Nasdaq but they suggested I cut my word count. Besides, the Nasdaq does not have a head-and-shoulders pattern anyway.

Here is a paragraph I wrote for the piece but did not include in the version I sent in for editing. If anyone thinks technical analysis is voodoo (you would not be reading this blog, for starters) here is proof from two unlikely supporters:

"Technical analysts have validated the head-and-shoulders pattern, of course, but both government and academic research has found merit in its predictive power. A paper published in 1995 by the New York Fed said the pattern did indeed have predictive power. And more recently, Prof. Andrew Lo of the Sloan School of Management at the Massachusetts Institute of Technology (MIT) completed a study of the pattern, calling it “very valuable information.”

I don't want to deceive here as both studies were not 100% in the chartists' camp. Some patterns worked and some did not. Some worked in some markets but not in others. But the bottom line is that head-and-shoulders patterns are real, have value and can help a skilled practitioner make money.

Just to end on a light note, here is something I added knowing it would not make the cut during edit:

I wrote: Not to be dramatic but the ensuing cry that arose was like Paul Revere's ride alerting the masses of the danger coming.

Then I followed with: The bears are coming! The bears are coming!

Maybe you have to be an American, or at least a student of the American Revolution to get it.

I'm out of time tonight so if anyone wants the links to the Fed and MIT articles, just ask.

Wednesday Preview

I have to tread lightly here as I do not want to give anything away before Wednesday's Barron's Online column comes out. But here are a few of the topics I am going to cover:

1. The head-and-shoulders EVERYONE sees in the market.
2. What I think about it (remember I was not a fan of the generally accepted definition of Golden Cross).
3. What level on the S&P constitutes a breakdown.
4. Ditto Nasdaq
5. Canary in the coalmine stocks and sectors (if there is room)
6. One or two indicators on the major indices I am watching

And just when they were thinking of bumping Brazil up to investment grade, it was the biggest loser of the major emerging markets Tuesday. Do you get the feeling everyone is looking at the market the wrong way?

Retail

You know it and I know it although the government seems to think otherwise. Consumers are not buying the same amount of crap they used to buy. And then comes Joltin' Joe Biden with another of his famous foot in mouth but true statements - "we misread the economy."

Sounds like Roger Clemens misremembering.

OK, it was a mistake and one made by optimists. I'd rather have optimists in charge (any party) but couch it a little, won't you?

In today's column, I made special note that the market knew this weeks before Joe admitted it (the specific Biden quote was left on the cutting room floor). It is amazing how the stock market can see into the future as retail stocks were already showing problems weeks ago.

When I say the market knew I mean that it knew something was wrong. There is no way it can know specifically what that something was so don't accuse me of fortune telling.

But why? How?

The answer is that somebody always knows something or thinks they know something. They act (by selling retail stocks, in this case) and the next guy sees that. And so on and so on. Start with enough smarty pantses and you can see how supply and demand for retail stocks can drive prices lower BEFORE any news is disseminated to the masses.

Although many retail stocks reversed course today to close higher (check out Kohl's - KSS) the damage is done. The Dow was up because some analyst (you know, the ones that got you out of the market in October 2007 - lol) removed his sell rating on American Express.

It is still a cow chip index.

Jobs are job-one

OK, I borrowed Ford slogan of old - quality is job-one. How fitting to use a car company boast in these times.

This is a snapshot from MarketWatch. What I like is how much "they" overestimated the improvement in job losses. So much for all the recovery-niks.

The technician in me see a broken trend of things getting "less-bad."

Golden Cross or Golden Goose?

The title of this blog post was the pre-edited title for today's column. Considering I think that stocks will not turn to gold it is a much better capture of my thinking. Perhaps it was just not snappy enough as a headline for an online news magazine where I have to compete for eyeballs.

Here's the "abstract" telling the reader what the story is about:

"Some think that the Nasdaq has rung the bell making it safe to buy stocks again."

Clearly, I do not and I do not believe that the golden cross on the Nasdaq or the tech sector or the yen for that matter mean anything for the market as a whole.

I've taken a lot of heat lately for not accepting the bull side. Somehow that makes me feel better in that I do not agree with the masses. I learned from a trader friend a long time ago that if make a trade and then want to throw up on your keyboard you probably made a good trade.